Reserve Bank of India

For those who have followed the scrap between Raghuram Rajan, governor of the Reserve Bank of India, and his counterparts at the European Central Bank and the Federal Reserve on the ill-effects of Fed tapering, Benoît Cœuré’s thoughtful speech today is worth a read.

In Mr Rajan’s view, the way the Fed conducts its monetary policy is irresponsible. The US central bank acts merely on the basis of national interest, with scant regard for the ramifications of mass dollar printing in a world where the dollar remains the dominant reserve currency.

These attacks have usually been parried with remarks that central banks such as the Fed (and, given its role as issuer of the only other real reserve currency, the ECB) have little choice but to act within the national interest given the scope of their mandates. From Mr Coeure’s boss Mario Draghi earlier this year:

Draghi:Mr Rajan is really an excellent economist. What one would have to demonstrate to speak of selfishness is the following. One would have to show that monetary policy actions within the United States, the ECB and so on were decided for reasons other than for the sake of the mandate and that, as a result, they were harmful to other countries. As I said, the priority for all of us is compliance with our mandate, which for us is maintaining price stability and for the Federal Reserve Board is the dual mandate.

Mr Cœuré’s speech is interesting as, while he does not go so far as to side with Mr Rajan, he is not so intellectually dishonest as to say that all is fine with the pre-crisis orthodoxy. In short, this said that if everyone just sticks to their inflation targeting mandate and flexible exchange rates everything will be just great. Read more

The Reserve Bank of India on Friday raised its repo rate – the rate at which the central bank lends to commercial banks – by 25 basis points to 8.25 per cent. The move was widely expected by economists, though some predicted a pause after weak industrial production figures earlier this week.

India’s central bank has upped its campaign against inflation, raising rates by half a percentage point, twice previous rate rises. This is the first half point rate rise since 2008 (see chart).

The move comes despite “signs of moderating growth” in the economy, which shows how worried the Bank is about inflation. Strong consumer demand in the country has aggravated the global issue of rising commodity prices, adding to domestic inflationary pressures. That strong demand, in turn, has probably been encouraged by relatively low rates. Indeed, according to the Bank:

…demand has been strong enough to allow significant pass-through of input price increases. Importantly, this is happening even as there are visible signs of moderating growth, particularly in capital goods production and investment spending, suggesting that cumulative monetary actions are beginning to have an impact on demand [emphasis ours]

High and rising inflation has prompted a quarter point rate rise from the Reserve Bank of India, effective immediately. The move was largely expected. Both the repo and reverse repo rates are affected, now standing at 6.75 and 5.75 per cent, respectively.

Annual inflation rose to 8.31 per cent in February, against a target of 4-4.5 per cent. “The underlying inflationary pressures have accentuated, even as risks to growth are emerging,” said the Bank in a statement. “Risks to inflation remain clearly on the upside.”

In addition to food and energy related price pressure, inflationary risks are heightened by growing demand. Read more

Higher interest rates might be on their way in India if oil prices remain high, according to the central bank. Events in Egypt could drive up oil prices and impact monetary policy, the deputy governor has said.

“A whole set of events unfolded in the Middle East which are starting to have an impact on oil prices and that is something we didn’t anticipate at the time of making the policy announcement on January 25,” Subir Gokarn said on Sunday. “It is going to have an impact on our thinking, on our actions going forward.” Rates were raised 25bp on January 25. Mr Gokarn’s comments suggest that with hindsight the Bank might have raised them further. Read more

India’s Reserve Bank has raised rates to tackle inflation, while extending bank liquidity measures due to expire next week. The repo and reverse repo rates stand 25bp higher at 6.5 and 5.5 per cent, respectively, while easing measures are extended to April 8.

The rate rise was prompted by recent price rises. “Inflationary tendencies are clearly visible,” said governor Duvvuri Subbarao in the statement. “Inflation is the dominant concern… the reversal in [its] direction is striking.” The strength of his words make a 25bp rate rise seem insignificant.

But given global inflationary pressures from food and fuel, India’s December figure was not so dramatic. Viewed historically, annual wholesale price rises of 8.4 per cent still fit into the downward trend seen since April of last year, when inflation was running at 11 per cent. It is too early to say whether December’s figure is the start of a sharp increase in inflation – and today’s decision should make that a little less likely.

Despite the tightening measure, the RBI also announced today that it would alter and extend easing measures Read more

Thailand, Indonesia and India have all made bullish noises of late, suggesting they may raise rates in the near future.

Indonesia’s central bank governor said today that it remained vigilant against rising inflationary pressures, which is good to know from a bank that has been keeping at least one eye firmly on growth. Consumer price inflation rose to 6.96 per cent in the year to December, against a 2011 target of 5 per cent +/- 1 per cent. The central bank has kept rates at their post-crisis low of 6.5 per cent to drive growth via commercial loans, Reuters reports. The IMF has called on the country to raise rates, which recently cut import duties on food to try to dampen price rises.

India is expected to raise rates next Tuesday, January 25. A “vast majority” of Read more

Liquidity measures are given their own paragraph in today’s monetary policy announcement from the Reserve Bank of India, as tempering inflation allowed the central bank to hold rates. The (temporary) end to the Bank’s rate normalisation programme was expected after the governor gave a strong hint last month.

“The extent of [liquidity] tightness has been beyond the comfort level of the Reserve Bank,” said the statement, which announced two liquidity injection measures. There has been a cash crunch in the banking sector since at least early November, when the RBI extended temporary easing measures.

The first measure, which has been used temporarily before, is to reduce the amount banks have to keep with the central bank. The statutory liquidity ratio will be permanently reduced from 25 to 24 per cent with effect from December 18. The last time this was done, one estimate equated the reduction to an additional 45,000 crore Rs ($10bn) liquidity.

Markets anticipate further easing from the Reserve Bank of India. Twelve-year bond prices are climbing, apparently on speculation that the central bank will intervene to buy the securities to ease the cash crunch facing banks. Bloomberg reports:

The yield on the most-traded 2022 note fell after the Reserve Bank of India last week bought bonds through an open- market auction for the first time since September 2009. The central bank on Nov. 4 bought back 83.5 billion rupees ($1.9 billion) of debt, after offering to purchase as much as 120 billion rupees.

The cash crunch in India’s banking sector should not be allowed to disrupt economic activity. That’s the message from the Reserve Bank of India, which has raised its repo and reverse repo rates by 25bp. The repurchase rate is now 6.25 per cent; the reverse repurchase rate at 5.25 per cent.

Robust domestic growth and continued high inflation were given as the main reasons for continued rate normalisation. But governor Duvvuri Subbarao said rate rises were likely to slow, barring any inflation shocks: “Based purely on current growth and inflation trends, the Reserve Bank believes that the likelihood of further rate actions in the immediate future is relatively low.”

Temporary measures designed to ease a cash crunch in the banking sector over the weekend have been extended to run till Thursday. Additional liquidity will be provided to banks through an extra daily auction, since the Bank’s “liquidity adjustment facility window … has been in … deficit … recent[ly]“. Extra auctions were initially set for October 29, 30 and November 1. Now, auctions will also take place on November 2, 3 and 4.

Banks can also avail themselves of a temporary reduction in the statutory liquidity ratio: they will be allowed to hold 24 per cent rather than 25 per cent with the central bank. By one estimate, this small reduction is equivalent to an additional $10bn liquidity. Read more

India’s Bank rate, standing facilities and Liquidity Adjustment Facility – in short, the key tools the Bank uses to transmit its policy decisions to the real economy – are to be examined and compared with processes at major central banks by a special team at the RBI. Suggestions for changes are expected in three months’ time from the newly constituted Working Group on Operating Procedure of Monetary Policy, the Bank said.

The system of daily auctions, which absorb or inject liquidity – the Liquidity Adjustment Facility, or LAF – will come under particular scrutiny. Here there are no sacred cows: the group will examine the frequency and timing of auctions; the maturity period of the repos and reverse repos used to inject/absorb liquidity; and the size of the gap between the repo and reverse repo rates (the “corridor”). Indeed, the group should consider whether there should be a corridor at all. If so, it should consider whether its width be fixed or variable; and how to optimise its efficiency. Read more

The Reserve Bank of India has raised the repo rate 25bp to 6 per cent, and raised the reverse repo 50bp to 5 per cent.

Blistering growth in industrial production means the central bank was likely to focus on containing domestic inflation rather than worrying about a possible slowdown in global growth. Inflation fell in July and August but is “likely to remain at unacceptably high levels for some months”.

“Inflation remains the dominant concern in macroeconomic management,” reads the statement. “About two-thirds of the August inflation can be attributed to items other than food articles and products. Notwithstanding slight moderation in August 2010, the headline inflation remains significantly above the trend of 5.0 – 5.5 per cent in the 2000s.”

The bank also wants to end the “prevalence of negative real interest rates”, Read more

Most of the rate rises expected in India have already happened, if the RBI’s quarterly survey of professional forecasters is any indication.

The repo rate, currently 5.75 per cent, will end the financial year 2010-11 slightly higher than previously thought, at 6.25 per cent, ending the following year at 6.5 per cent. The reverse repo rate, currently 4.5 per cent, is still expected to finish FY 2010-11 at 4.75 per cent, but is expected to rise considerably to 5.5 per cent by end 2011-12 (not shown on chart). Read more

Portfolios have been rearranged among deputy governors at the RBI. India’s central bank made the announcement late yesterday, giving little explanation. In particular, key changes have been made to the remit of deputy governor Dr K C Chakrabarty. The Times of India reports:

Departments like rural and urban cooperative banks have been re-allocated to Usha Thorat while departments of payments and settlement systems have been given to Shyamala Gopinath. Department of administration & personnel management, including works related to Right to Information Act, will be under Subir Gokarn. All these departments were earlier under Chakrabarty.

Duvvuri Subbarao, the governor of the RBI, told the FT that the expectations of the world’s senior economic policymakers about the volume of capital inflows in emerging markets had dramatically changed over the past three months. “Even three months ago, we were talking about a possible flood of capital flows,” he said. Read more

The Reserve Bank of India has raised the repo rate 25 basis points, and the reverse repo rate 50bp – more than expected. “The dominant concern that has shaped the monetary policy stance in this review is high inflation,” said the bank. Rates now stand at 5.75 and 4.5 per cent, respectively.

While the recovery has consolidated within India, the central bank notes a “significantly” altered global economy: Read more

The Money Supply team

Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS

Claire Jones is the FT's Eurozone economy correspondent, based in Frankfurt. Prior to this, she was an economics reporter in London. Before joining the Financial Times, she was the editor of the Central Banking journal. Claire studied philosophy and economics at the London School of Economics. RSS

Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS

Sarah O’Connor is the FT’s economics correspondent in London. Before that, she was a Lex writer, covered the US economy from Washington and the Icelandic banking collapse from Reykjavik. Sarah studied Social and Political Sciences at Cambridge University and joined the FT in 2007. RSS

Ferdinando Giugliano is the FT's global economy news editor, based in London. Ferdinando holds a doctorate in economics from Oxford University, where he was also a lecturer, and has worked as a consultant for the Bank of Italy, the Economist Intelligence Unit and Oxera. He joined the FT in 2011 as a leader writer. RSS

Emily Cadman is an economics reporter at the FT, based in London. Prior to this, she worked as a data journalist and was head of interactive news at the Financial Times. She joined the FT in 2010, after working as a web editor at a variety of news organisations.
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Ralph Atkins, capital markets editor, has been writing for the Financial Times for more than 20 years following an economics degree from Cambridge. From 2004 to 2012, Ralph was Frankfurt bureau chief, watching the European Central Bank and eurozone economies. He has also worked in Bonn, Berlin, Jerusalem and Brussels. RSS

Ben McLannahan covers markets and economics for the FT from Tokyo, and before that he wrote Lex notes from London and Hong Kong. He studied English at Cambridge University and joined the FT in 2007, after stints at the Economist Group and Institutional Investor. RSS